MEXICO SETS RULES

MEXICO SETS RULES

Mexico has unveiled long-awaited initial contract terms for the first 14 oil and gas areas it is auctioning in a historic tender round starting next year. They impose a ban on oil majors teaming up to bid and a five-block limit on bids from any company or consortium.

"The day has come," Pedro Joaquín Coldwell, energy minister, told a packed hall of oil executives, financiers and analysts gathered to hear the auction rules . Mexico expects investment of some $1bn per block and future production of more than 80,000 barrels a day from the 14 areas.

With production costs of around $20 a barrel in the shallow-water fields, a 40-year history of production in the area and a wealth of seismic data and infrastructure in place, Mexico is confident that the blocks remain attractive despite plunging oil prices.

"We must be aware that this bidding round takes place amid volatility in prices in the international crude market, which will oblige companies to be more selective about which countries and areas they invest in," Mr Joaquín Coldwell said.

But he added: "This circumstance will showcase the competitive strengths of Mexico's Round One, which offers a highly diversified portfolio of fields and areas for exploration and extraction, [and] clear and stable investment rules."

The government did not spell out its expected total share of revenues from tax, royalties and other charges. It has said it is hoping for around 75 per cent, but some companies say falling prices will put it under pressure to accept less. "We haven't set a maximum," said Miguel Messmacher, income undersecretary.

Winning bidders will be selected based on who offers the best price for the government and who offers the most investment. The deadline for bids is July 15.

Mr Messmacher said there may be fewer bidders than expected as a result of the oil price slide, but no sweeteners to the contract terms were planned.

Oil majors — defined as those with daily production of 1.6m barrels of oil equivalent — will not be able to make joint bids — echoing a limit imposed by the US in the Gulf of Mexico, said Juan Carlos Zepeda, head of the National Hydrocarbons Commission (CNH) which will run the bidding process.

The limit will not apply to subsequent tenders for deepwater, extra-heavy oil or unconventional hydrocarbons due to be offered later next year because the risks and investment needed there will be greater.

Would-be operators will have to demonstrate they have capital of at least $1bn — a requirement that will ensure "we have solvent companies bidding," Mr Zepeda said. In addition, no company can be part of more than one consortium, and consortiums or individual companies can bid for no more than five of the 14 blocks.

The government said the limits, written into the rules at the insistence of Mexico's antitrust watchdog, were designed to diversify risk and promote competition in order to achieve the primary goal of the reform: an increase in hydrocarbons reserves and production as fast as possible.

Pemex, Mexico's state oil company, has seen output sink to some 2.3m barrels per day from a peak of about 3.4m a decade ago and Mexico, a manufacturing powerhouse hobbled by high electricity costs, is betting on unlocking its vast reserves in order to foster economic growth.

Pemex, an expert in shallow-water production, is expected to bid for some of the 14 blocks but will need to prove it has the financial firepower. "That is a discussion we'll have to have," Mr Messmacher told reporters.

The government is hoping for a rapid ramp up: Mexico aims to have 26 wells drilled in the 14 blocks in the first 36 months, said Ms Melgar.

Interested companies will be able to buy the bid documents — which cost 5.3m pesos ($360,000) — from Monday and will have access to data rooms with full geological and other information from January 15. They will have until March 31 to pre-qualify; the CNH will announce the list of which companies have pre-qualified on April 27.

The tenders will have "a level of transparency that is unprecedented internationally," said Lourdes Melgar, hydrocarbons undersecretary. The scandal-hit government of Enrique Peña Nieto had to scrap a recent high-speed train tender after the process was questioned.

Mexico has never held an oil auction before: until the state's expropriation of the oil industry in 1938, Mexico awarded contracts on a discretionary basis; Pemex then took over the sector.

Round One will continue next year with tenders for shallow-water production blocks, onshore fields, unconventionals and Chicontepec, a tricky formation that has yielded disappointing results to date. The deepwater exploration tenders are seen as the biggest prize in the auction process.

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